Initial public offerings can lead to fast gains for bulls when the story and market conditions are just right. The counterbalance is when bears leave the carcass of the former bull population and schedule their own kind of IPO, shorthand for “investors panicking out.”
Three recently red-hot cloud IPOs, which have taken equally decisive beatings on the downside over the past few weeks, are Twilio Inc (NYSE:TWLO), Acacia Communications, Inc. (NASDAQ:ACIA) and Nutanix Inc (NASDAQ:NTNX).
The question some might be asking at this point in time is whether investors should be backing up the truck and yelling “enough already!” in these three cloud stocks.
At the end of the day, Twilio, Acacia and Nutanix are all different, but each also share similarities. Let’s take a closer look, both off and on the price charts of these IPOs, to see what, if any, trading opportunities might exist based on the evidence.
Cloud Stocks: Twilio Inc (TWLO)
Click to Enlarge Twilio has been called, “the future of cloud computing” by none other than CNBC’s James Cramer. For his part, and similar to my prior analysis on TWLO stock two months back, it will be mentioned Cramer had an enviable winner in backing Twilio on the way up.
The bad news is that Cramer has remained mostly quiet on this cloud-play IPO the past couple months. That is, until (a bit too late for my taste) he said Twilio shares needed to hold $40 just last week.
Unlike Cramer, my fist pounding called for playing Twilio with less risk. In my opinion, TWLO stock’s volatility, some respect for a large bearish population in excess of 30% of the float and down-the-road, potential lock-up period hazards made enough sense to prepare for.
Finally, and provoking an update from Cramer, last Friday brought in devilish, detailed news Twilio was arranging a secondary, follow-on offering of 7 million shares at $40 in TWLO stock.
That report was good for knocking shares off by 7%, but TWLO was already off roughly 37% from its early October high near $71. Waiting for the specifics on the deal also proved costly. The fact is Twilio was already off more than 27% from Oct. 9 and just prior to the initial report the company was filing a proposed follow-on offering with the SEC.
Considering that one unwanted surprise is out of the bag, but other hazards remaining, I like the idea of playing TWLO stock as a cautious, short-term bull and removing the looming lock-up period risk. With shares at $37.35, the Nov $40/$45 bull call spread is attractive.
Priced for $1 mid-market, the expiration return amounts to 400% if TWLO is above $45. My suggestion is more pragmatic: Should Twilio shares recapture $40 and the secondary pricing, sell the Nov $45/$50 call spread to establish a lower risk, bullishly positioned butterfly.
Cloud Stocks: Acacia Communications, Inc. (ACIA)
Click to Enlarge Second on our “hit or been hit” list of cloud computing IPOs is Acacia. Just like Twilio, Acacia also found the market conditions this past month to its liking and enough to warrant a secondary follow-on offer.
In the case of ACIA stock, the secondary consists of 4.5 million shares at $100. Approximately 27% of the money raised will go back to the company to fund growth. The remainder and bulk of the sale however, is being distributed to existing shareholders.
Other shareholders in this cloud-play IPO haven’t been impressed. Shares dropped three weeks ago by roughly 9% to $100 on the report and are now changing hands at an impressive 26% discount at $73.66 compared to the secondary pricing.
Shares of Acacia are testing 50% to 62% Fibonacci support, have filled a bullish price gap and are showing some minor stochastics divergence, while hitting the lower Bollinger band. Having said that, I’m not gung-ho bullish on ACIA stock at this time. As with TWLO, this IPO also has a lock-up period to concern itself with. And this one is sooner. Anxious and less-privy existing holders may begin to cash out come mid-November.
Back to not being gung-ho bullish, I am optimistic at some level. It just happens that price level is still firmly a ways away. In order to profit and/or position from this stance right now, selling the ACIA Nov $55/$50 bull put spread is intriguing. With shares of ACIA at $75.70 the spread can fetch a credit of 70 cents and allows the trader to collect income with an expiration margin of safety of 27% or breakeven of $54.30.
Further and due to the limited risk characteristics of this spread, this IPO trader can effectively get long at even lower price levels if he or she wants to become a more committed bull and own shares.
Cloud Stocks: Nutanix Inc (NTNX)
Click to Enlarge Nutanix is our last cloud-play IPO, but it’s different in more than one way from TWLO and ACIA.
First, NTNX is much younger than both TWLO and ACIA. The company is just about to celebrate the one-month anniversary of its IPO, which means the feared lock-up period is still five months out and shouldn’t be a near-term issue.
Second, shares of Nutanix have already forged a near-complete reversal of fortune on the price chart. In the short time it’s been trading, NTNX has gone from exploding higher out-the-gate in two sessions to declining more than 40% over the course of three-plus weeks.
The bearish carnage has been so severe that this cloud-play IPO is all the way back down in a testing position of its first day and all-time-low of $26.10. For the optimistic, the price action sets up a double bottom, but I’m not convinced it will hold.
In good conscience I can’t say NTNX is a buy, sell or a hold for that matter. Options liquidity is less-than-terrific, so that’s one mark against it as spreads become more problematic.
Further, despite a lock-up period that’s still months away, the fact investors are unwilling to give NTNX stock the benefit of the doubt, let alone the opportunity to establish a secondary offering like TWLO and ACIA, are warnings to respect from the sidelines.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.